Even as Paraguay celebrated the bicentennial of its independence from Spain in 2011, the country’s internal political and economic struggles reflected the challenges of overcoming its troubled past. Many of those struggles pitted Pres. Fernando Lugo—swept into office three years earlier by a populist alliance that ended 61 years of Colorado Party (CP) rule but quickly fractured—against a legislature and government bureaucracy still controlled by the CP. That party, dominated by powerful oligarchs and agribusiness interests, blocked most of Lugo’s reform efforts. Large landholders, who produced most of the country’s soybeans and beef, blocked his plans for land redistribution (less than 2% of the population controlled 80% of the country’s arable land) and environmental protection (reducing spraying of pesticides, thought to harm subsistence farmers). About 19% of Paraguay’s population, and 42% of the rural population, lived below the poverty line, but Lugo’s campaign to improve economic opportunities for the poor—dismissed as an “army of beggars” by one CP lawmaker—largely foundered after soybean producers blocked his efforts to increase taxes.

A hot-air balloon is launched in Asunción, Para., on May 15, 2011, at a celebration marking …

Ubaldo Gonzalez—Xinhua/Landov

Lugo’s administration had limited successes in tackling cocaine trafficking, with a series of large seizures during the year (including one of nearly a ton), mostly in the three-borders region with Brazil and Argentina, long a haven for smugglers. Paraguay served as a way station en route from the Andean countries to Africa and Europe.

Paraguay’s economy, highly dependent on exports of soybeans and other agricultural products, followed record-setting growth of 15.3% in 2010 with a solid increase estimated at 6.4% in 2011. The country settled a dispute with Brazil over revenue sharing from the massive Itaipú hydroelectric dam, bringing in a badly needed $240 million annually in additional revenue. Also in 2011, the environmentally contentious Yacyretá hydroelectric dam was inaugurated and brought to full capacity, 37 years after Paraguay and Argentina signed the treaty to build it. In late September an outbreak of foot-and-mouth disease forced Paraguay to ban beef exports, which usually generated revenues of some $800 million annually.

Former interior minister Sabino Montanaro, dubbed the “cruel right hand” of the late dictator Alfredo Stroessner, died in September in Asunción while under house arrest on charges of having killed opponents of the regime in the 1970s and ’80s. Montanaro, 89, had returned to Paraguay in 2009, 20 years after a coup that overthrew Stroessner. Earlier in the year, the government began making an additional $40 million in reparation payments to victims of the Stroessner regime.

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landlocked country in south-central South America. Paraguay’s recent history has been characterized by turbulence and authoritarian rule. It was involved in two of the three major wars on the continent—the War of the Triple Alliance (1864/65–70), against Argentina, Brazil, and...

country of South America that occupies half the continent’s landmass. It is the fifth largest country in the world, exceeded in size only by Russia, Canada, China, and the United States, though its area is greater than that of the 48 conterminous U.S. states. Brazil faces the Atlantic Ocean...